BTís policy is to achieve best practice
in our standards of business integrity in all our operations. This includes a
commitment to maintaining the highest standards of corporate governance and
ethics throughout the group.
The company took part in the
consultations leading up to the publication in July 2003 of the UKís new
Combined Code on Corporate Governance. BT is obliged this year to report on how
it has applied the previous version of the Combined Code. The directors
consider that BT has, throughout the year, complied with the provisions of that
version of the Code. This section also reports on BTís position in respect of
the provisions introduced by the new Combined Code. The company will report
fully on its compliance with the new Code next year.
Composition and role
The Board, which operates as a single team, is
currently made up of the part-time Chairman, the Chief Executive,
four other executive directors and seven non-executive directors.
All of the non-executive directors meet the criteria for independence
set out in the new Combined Code and are therefore considered
by the Board to be independent. It is BTís policy that the Board
will comprise a majority of independent non-executive directors.
biographies are available in the Board of directors and Operating
Boardís principal focus is the overall strategic direction, development
and control of the group. In support of this the Board approves
the groupís values, business practice policies, strategic plans,
annual budget, capital expenditure and investments budgets, larger
capital expenditure proposals and the groupís overall system of
internal controls, governance and compliance authorities. It also
has oversight and control of the groupís operating and financial
performance. These responsibilities are set out in a formal
statement of the Boardís role. The Board has agreed the groupís
corporate governance framework, as part of which it has empowered
the companyís key management committee, the
Operating Committee, to make decisions on operational and
other matters. The roles and powers of these committees are set
out later in this report under Principal Board committees. Their
powers and the authorities delegated to individual members of
the Operating Committee are available to everyone in the group on the groupís intranet site.
meets every month, except in August. Additionally, it meets on an ad hoc basis
to consider matters which are time critical. The Board met 11 times during the
2004 financial year.
of the Chairman and the Chief Executive are set out in written job
descriptions. In addition to chairing the Board, the Chairman is responsible
for consulting the non-executive directors, particularly the Deputy Chairman,
on corporate governance issues, matters considered by the Nominating Committee,
which the Chairman chairs, and the individual performances of the non-executive directors. With the Chief Executive and the Secretary, he ensures theBoard is kept properly informed,
is consulted on all issues reserved to it and that its decisions are made in a
timely and considered way that enables the directors to fulfil their fiduciary
duties. The Chairman ensures that the views of the shareholders are known to
the Board and considered appropriately. He represents the company in specified
strategic and Government relationships, as agreed with the Chief Executive, and
generally acts as the bridge between the Board and the Companyís executive
team, particularly on the Groupís broad strategic direction. The Chief
Executive has final executive responsibility to the Board for the success of
Secretary manages the provision of timely, accurate and considered information
to the Board for its meetings and, in consultation with the Chairman and Chief
Executive, at other appropriate times. He recommends to the Chairman and the
Chief Executive, for Board consideration where appropriate, the companyís
corporate governance policies and practices and is responsible for their
communication and implementation.
BTís non-executive directors
The desired combination of experience,
skills and other attributes that the non-executive directors as a whole are to
bring to the Board is agreed and reviewed by the
Nominating Committee. This profile is used by the Committee to assess
the suitability as non-executive directors of candidates put forward by the
directors and outside consultants before the Committee meets short-listed
candidates and goes on to recommend to the Board a candidate for appointment.
non-executive directors provide a strong, independent element on the Board.
Between them, they bring experience and independent judgement, gained at the
most senior levels, of international business operations and strategy,
marketing, technology, communications and political and international affairs.
The Chairman and the non-executive directors hold regular dinners at which they
discuss matters without the executive directors being present. At least
annually, these provide an occasion for the non-executive directors, led by the
Deputy Chairman, Sir Anthony Greener, to meet, without the Chairman present to
review the Chairmanís performance.
Anthony Greener, the Deputy Chairman, is the senior independent director. He
chairs the Audit
and Remuneration committees. In his capacity as the chairman of
the Remuneration Committee, he meets with BTís major institutional
shareholders. The Deputy Chairman also continues to be available to discuss
matters with institutional shareholders where it would be inappropriate for
those discussions to take place with either the Chairman or the Chief
Executive. He will also attend, at his discretion and in consultation with the
Chairman and the Chief Executive, other meetings with shareholders during the
year. The other non-executive directors may attend, at their request, meetings
with the companyís major shareholders and others.
Non-executive directors are appointed initially for three years,
subject to three monthsí termination notice from either BT or the
director. At the end of the first three years the appointment may
be continued by mutual agreement. Each non-executive director is
provided, upon appointment, with a letter setting out the terms
of his or her appointment, including membership of Board committees,
the fees to be paid, the time commitment expected from the director
and covering such matters as the confidentiality of information
and the companyís share dealing code. The appointment letter was
reviewed by the Nominating Committee following the publication
of the new Combined Code and new letters sent to all non-executive
directors which align the companyís letter, as appropriate, to the
sample letter annexed to the new Code.
All directors are
required by the companyís articles of association to be elected
by shareholders at the first AGM after their appointment, if appointed
by the Board. A director must subsequently retire by rotation
at an AGM at intervals of not more than three years. The director
may seek re-election.
The Chairman and
executive directors have service agreements, which are approved
by the Remuneration Committee. Information about the periods of
these contracts is in the
on directorsí remuneration.
The Board has a
procedure for directors, in furtherance of their duties, to take
independent professional advice if necessary, at the companyís
expense. In addition, all directors have access to the advice
and services of the Secretary, the appointment and removal of
whom is a matter for the whole Board. He advises the Board on
appropriate procedures for the management of its meetings and
duties (and the meetings of the companyís principal committees),
as well as the implementation of corporate governance and compliance
within the group.
the directors take part in an induction programme when they receive
information about BT, the role of the Board and the matters reserved
for its decision, the terms of reference and membership of the
principal Board and management committees, and the powers delegated
to those committees, the companyís corporate governance practices
and procedures, including the powers reserved to the groupís most
senior executives, and the latest financial information about
the group. This is supplemented by visits to key BT locations
and meetings with members of the Operating
Committee and other key senior executives. Throughout their
period in office the directors are continually updated on BTís
business, the competitive and regulatory environments in which
it operates, technology and corporate social responsibility matters
affecting BT and the communications industry as a whole, by written
briefings and meetings with senior BT executives. Directors are
also advised on appointment of their legal and other duties and
obligations as a director of a listed company, both in writing
and in face-to-face meetings with the Secretary. They are reminded
of these duties each year and they are also updated on changes
to the legal and governance requirements upon the company and
themselves as directors. During the 2004 financial year, for example,
they have been advised on the changes to UK corporate governance
brought about by the new Combined Code, continued to receive briefings
on the US Sarbanes-Oxley Act of 2002, which affects BT because
its securities are registered with the US Securities and Exchange
Commission (SEC), and various corporate proposals from the European
Commission. They also received an updated briefing on UK, US and
international financial reporting developments.
are in place concerning the content, presentation and delivery
of papers for each Board meeting, so that the directors have enough
information to be properly briefed sufficiently far ahead of each
Board meeting and at other appropriate times.
During summer 2003
the Board carried out, through a questionnaire and discussion
with directors, an evaluation of its performance and the quality
of board processes. The results of that exercise were considered
by the Board in July 2003 and a number of actions agreed. A further
evaluation, including on the performance of directors and the
Boardís committees, will be carried out during 2004.
and officersí liability insurance and indemnity
For some years the company
has purchased insurance to cover its directors and officers against
their costs in defending themselves in civil legal proceedings
taken against them in that capacity and in respect of damages
resulting from the unsuccessful defence of any proceedings. To
the extent permitted by UK law, the company also indemnifies its
directors and officers. Neither the insurance nor the indemnity
provide cover where the director has acted fraudulently or dishonestly.
To meet best corporate
governance practice, Audit, Remuneration and Nominating Committees
have long been an established part of BTís system of governance.
Each committee has written terms of reference, which are available
on the companyís
website. The minutes of Audit and Nominating Committee meetings
are sent, at their request, to directors who are not a member
of a committee. In the case of the
Remuneration Committee, minutes are circulated, on request,
to other non-executive directors as well as to members of the
Audit Committee is chaired by Sir Anthony Greener, the
Deputy Chairman and senior independent director. The other members
are Maarten van den Bergh, Clay Brendish, Lou Hughes, John Nelson
and Carl Symon. They are all independent non-executive directors.
They were members of the committee throughout the 2004 financial
year. The Board considers that the Committeeís members have broad
commercial experience and extensive business leadership, having
held various roles in accountancy, financial management and supervision,
treasury and corporate finance and that there is a broad and suitable
mix of business, financial and IT experience on the Committee.
The Board has reviewed membership of the Committee and is satisfied,
for the purposes of the new Combined Code, that collectively the
Committee has recent and relevant financial experience.
Committee recommends the appointment and reappointment of the
companyís external auditors and considers their resignation or
dismissal, recommending to the Board appropriate action to appoint
new auditors. It ensures that key partners are rotated at appropriate
intervals. It discusses with the auditors the scope of their audits
before they commence, reviews the results and considers the formal
reports of the auditors and reports the results of those reviews
to the Board. It reviews the auditorsí performance, including
the scope of the audit, and recommends to the Board appropriate
a result of regulatory or similar requirements, it may be necessary
to employ the companyís external auditors for certain non-audit
work. In order to safeguard the independence and objectivity of
the external auditors, the Board has determined policies as to
what non-audit services can be provided by the companyís external
auditors and the approval processes related to them. Under those
policies work of a consultancy nature will not be offered to the
external auditors unless there are clear efficiencies and value
added benefits to the company. The overall policies and the processes
to implement them were reviewed and appropriately modified in
the light of the provisions of the US Sarbanes-Oxley Act of 2002
relating to non-audit services that external auditors may not
Audit Committee monitors the extent of non-audit work being
performed by the companyís auditors and approves such work before
it is undertaken. It also monitors the level of non-audit fees
paid to the external auditors.
Committee reviews the companyís published financial results,
the Annual Report and Form 20-F and other published information
for statutory and regulatory compliance. It also reviews the disclosure
made by the Chief Executive and Group Finance Director during
the certification process for the annual report about the design
or operation of internal controls or material weaknesses in the
controls, including any fraud involving management or other employees
who have a significant role in the companyís financial controls.
The Board, as required by UK law, takes responsibility for all
disclosures in the annual report.
Committee monitors and reviews the standards of risk management
and internal control, the effectiveness of internal control, financial
reporting, accounting policies and procedures, and the companyís
statements on internal controls before they are agreed by the
Board for each yearís annual report. It also reviews the companyís
internal audit function and its relationship with the external
auditors, including internal auditís plans and performance. It
reviews the arrangements for dealing, in confidence, with complaints
from employees about accounting or financial management impropriety,
fraud, poor business practices and other matters. At each of its
meetings, the Committee sets aside time to seek the views of the
companyís internal and external auditors in the absence of executives.
Group Finance Director, the Secretary, the groupís chief internal
auditor and the companyís external auditors attend the Committeeís
meetings. The Committee met four times during the 2004 financial
year. At its meetings the Committee has reviewed the companyís
full year and quarterly results and its Annual Report and Form
20-F and considered the adequacy of the financial systems that
have produced those results. It has reported its views to the
Board so it has been able to approve the results announcements
and the annual report for publication. It has also during the
2004 financial year considered the groupís risk register, as submitted
to it by the
Management Council, and reviewed the companyís internal
control, accounting systems, IT security and related matters.
It also approved the arrangements for employees to make confidential
complaints about accounting and other issues and adopted, for
the purposes of the Sarbanes-Oxley Act, a
code of ethics for the Chief Executive, Group Finance Director
and Director Group Financial Control and Treasury, which is consistent
with BTís overall statement of business ethics.
Remuneration Committee comprises solely independent non-executive
directors and is chaired by Sir Anthony Greener. It met four times
during the 2004 financial year. Further details about the Committee
are included in the Report
on directorsí remuneration.
Nominating Committee consists of the Chairman, the Deputy
Chairman, John Nelson and Maarten van den Bergh. Its members have
not changed during the 2004 financial year. It ensures an appropriate
balance of experience and abilities on the Board, using this evaluation
to review the size and composition of the Board and to recommend
any proposed changes to the Board. It keeps under review the need
for appointments to the Board, prepares a description of the specific
experience and skills needed for an appointment, considers candidates
who are put forward by the directors and external consultants,
and recommends to the Board the appointments of all directors
after having met short-listed candidates. It also reviews the
time required from the Deputy Chairman and other non-executive
directors to carry out their duties and advises the Board on succession
planning for the positions of the Chairman, Deputy Chairman, Chief
Executive and all other Board appointments. The Committee met
once during the 2004 financial year at which time it reviewed
the current structure profile and balance of the Board, reviewed
and recommended to the Board the continued appointments as non-executive
directors of Sir Anthony Greener and Maarten van den Bergh (neither
of whom took part in the review of his own position) and agreed
changes to the non-executive directorsí letter of appointment
to align it to recommended best practice.
The following table shows the attendance of directors at meetings
of the Board and Audit, Remuneration and Nominating
committees during the 2004 financial year.
is shown only for a committee
van den Bergh
and Management Council
The Chief Executive,
Ben Verwaayen, chairs the Operating
Committee, which meets weekly. The other members are the Group
Finance Director, the Chief Executives of BT Retail, BT Wholesale
and BT Global Services and the Chief Broadband Officer. The Secretary
attends all meetings. The Committee has collective responsibility
for running the groupís business end-to-end. To do that, it develops
the groupís strategy and budget for Board approval, recommends
to the Board the groupís capital expenditure and investments budgets,
monitors the financial, operational and customer quality of service
performance of the whole group, allocates resources across the
group within plans agreed by the Board, plans and delivers major
cross-business programmes and reviews the senior talent base and
succession plans of the group. Within the groupís corporate governance
framework, approved by the Board, the Operating Committee
is empowered to approve up to limits after which Board approval
is required, capital expenditure, disposals of fixed assets, the
making of investments by the group and divestments. It is authorised
to delegate these approvals, up to its own limits, to senior executives.
A sub-committee of the Operating
Committee, the Management Council, meets monthly. It
consists of the Operating Committee members plus a number
of other senior executives. It is an advisory forum supporting
the Chief Executive and the Operating Committee in policy
formulation, in areas such as cultural change, public policy,
reputation and business practices policies, human resources, pensions
matters and employment policies.
control and risk management
Board is responsible for the groupís systems of internal control
and risk management and for reviewing the effectiveness of
those systems. Such systems are designed to manage, rather
than eliminate, the risk of failure to achieve business objectives;
any system can provide only reasonable and not absolute assurance
against material misstatement or loss.
Board also takes account of significant social, environmental
and ethical matters that relate to BTís businesses and reviews
annually BTís corporate social responsibility. The companyís
workplace practices, specific environmental, social and ethical
risks and opportunities and details of underlying governance
processes are dealt with in Our
people and Our
commitment to society.
has processes for identifying, evaluating and managing the
significant risks faced by the group. These processes have
been in place for the whole of the 2004 financial year and
have continued up to the date on which this document was approved.
The processes are in accordance with the guidance for directors
published in the UK in September 1999.
assessment and evaluation takes place as an integral part
of the groupís annual strategic planning cycle. The group
has a detailed risk management process, culminating in a Board
review, which identifies the key risks facing the group and
each business unit. This information is reviewed by senior
management as part of the strategic review. The groupís current
key risks are summarised in
key features of the risk management process comprise the following
led by the Secretary, review the groupís key risks and have
created a group risk register, describing the risks, owners
and mitigation strategies. This is reviewed by the Management
Council before being reviewed and approved by the Board.
||the lines of business
carry out risk assessments of their operations, have created
registers relating to those risks, and ensure that the key
risks are addressed.
report regularly to the Group Finance Director on the operation
of internal controls in their area of responsibility.
||the Chief Executive
receives annual reports from senior executives with responsibilities
for major group operations with their opinion on the effectiveness
of the operation of internal controls during the financial
||the groupís internal
auditors carry out continuing assessments of the quality of
risk management and control. Internal Audit reports to the
management and the Audit Committee on the status of
specific areas identified for improvement.
They also promote effective risk management in the lines of
||the Audit Committee,
on behalf of the Board, considers the effectiveness of the
operation of internal control procedures in the group during
the financial year. This follows consideration of the matter
by the Management Council. The Audit Committee
reviews reports from the internal auditors and from the external
auditors and reports its conclusions to the Board. The Audit
Committee has carried out these actions for the 2004 financial
joint ventures and associates, which BT does not control,
outside the UK have not been dealt with as part of the group
for the purposes of this internal control assessment.
Board has approved the formal statement of matters which are
reserved to it for consideration, approval or oversight. It
has also approved the groupís corporate governance framework,
which sets out the high level principles by which the group
is managed and the responsibilities and powers of the
Management Council and the groupís senior executives.
As part of this framework the development and implementation
of certain powers relating to group-wide policies and practices
are reserved to identified senior executives.
executives, led by the Chief Executive and the Group Finance Director
and including, as appropriate, the other executive directors,
hold meetings with the companyís principal institutional shareholders
to discuss the companyís strategy, financial performance and specific
major investment activities. The Deputy Chairman also attends,
at his discretion and in consultation with the Chairman and the
Chief Executive, meetings with shareholders during the year. As
explained in the Report
on directorsí remuneration, we also maintain contact,
when appropriate, through the chairman of the Remuneration
Committee and other senior executives to discuss overall remuneration
policies and plans. Contact with institutional shareholders (and
with financial analysts, brokers and the media) is controlled
by written guidelines to ensure the protection of share price
sensitive information that has not already been made generally
available to the companyís shareholders. The directors are provided
with reports and other written briefings from the companyís major
shareholders and analysts, either in full or through summaries
from the companyís brokers and are regularly informed by the Secretary
about the holdings of its principal shareholders. The Secretary
also surveys the companyís retail shareholders about the quality
of the companyís shareholder communications and share registration
We are continuing our policy that
shareholders vote on the annual report at the AGM. Shareholders
will also again be asked to vote on the Report
on directorsí remuneration.
It is part of our policy to involve
shareholders fully in the affairs of the company and to give them
the opportunity at the AGM to ask questions about the companyís
activities and prospects. We also give the shareholders the opportunity
to vote on every substantially different issue by proposing a
separate resolution for each issue. The Boardís opinion is that
the re-election and the fees of the auditors are interrelated
matters and should therefore be dealt with in one resolution.
The proxy votes for and against
each resolution, as well as abstentions, will be counted before
the AGM and the results will be made available at the meeting
after the shareholders have voted on each resolution on a show
of hands and at the end of the meeting. It is our policy for all
directors to attend the AGM if at all possible. Whilst, because
of ill health or other pressing reasons, this may not always be
possible, in normal circumstances this means that the chairman
of the Audit, Nominating and Remuneration committees
is at the AGM and is available to answer relevant questions.
The Annual Review and, if requested,
the Annual Report and Form 20-F, together with the Notice of the
AGM, are sent to shareholders in the most cost-effective fashion,
given the large number of shareholders. We aim to give as much
notice as possible and at least 21 clear days, as required by
the companyís articles of association. In practice, these documents
are being sent to shareholders more than 20 working days before
Established procedures ensure the
timely release of share price sensitive information and the publication
of the companyís financial results and regulatory financial statements.
of business practice
To reinforce our commitment to achieve best practice in our
standards of business integrity and ethics, BT has a written statement
of business practice (The
Way We Work). The statement covers all our operations
and reflects the expectations in the area of corporate governance
and business practice standards. A copy of the statement has been
sent to every employee.
These high-level principles are
supported by a continuing and comprehensive communications programme
and online training. A confidential helpline and e-mail facility
are also available to employees who have questions about the application
of these principles. We also continue to require our agents and
contractors to apply these principles when representing BT.
It has always been BTís policy that no company in the group
shall make cash contributions to any political party. This policy
continues and appropriate arrangements are in place to implement
it throughout the group. However, the Companies Act 1985 requires
companies to obtain shareholder authority before they can make
donations to EU political organisations (which includes UK political
parties). The definition of political donations used in the Act
is very much broader than the sense in which these words are ordinarily
used. As a result, it covers activities which form part of normal
relationships between BT, individual politicians and the principal
political parties. These activities are not designed to provide
support to or to influence public support for any political party.
They would not be thought of as political donations in the everyday
sense of these words. They are entirely non-political in nature
and are designed so that BT can make MPs and others aware of key
industry issues and matters affecting the company.
authority we are requesting from shareholders at the AGM is not
designed to change the companyís stated policy of not making cash
contributions. It will, however, ensure that BT acts within the
provisions of the current UK law when carrying out the above activities.
They are carried out on an even-handed basis related broadly to
the major UK political partiesí electoral strength and the company
believes that they make an important contribution to the success
of BT. The level of political donations split as between the major
UK political parties is shown in the Report
of the directors.
main pension funds Ė the BT Pension Scheme and the BT Retirement
Plan Ė are not controlled by the Board but by separate trustees
who are company and union nominees, under independent chairmen.
The trustees look after the assets of the funds, which are held
separately from those of the company. The pension fundsí assets
can only be used in accordance with their respective rules and
for no other purpose.
by the directors of their responsibilities for preparing the financial
statements is included in the Statement
of directorsí responsibility. The directors report states
that the company is a going concern.
Sarbanes-Oxley Act of 2002
BT has securities
registered with the US Securities and Exchange Commission (SEC).
As a result, BT is obliged to comply with those provisions of
the Sarbanes-Oxley Act (the Act) applicable to foreign issuers.
BT will comply with the legal and regulatory requirements introduced
pursuant to this legislation, in so far as they are applicable
to the group.
the narrow and prescriptive definition under the relevant SEC
rules, it is the opinion of the Board that the Audit Committee
does not include a member who is an Ďaudit committee financial
expertí. However, the Board considers that the Committeeís members
have broad commercial experience and extensive business leadership,
having held various roles in
accountancy, financial management and supervision, treasury and
corporate finance and that there is a broad and suitable mix of
business, financial and IT experience on the Committee. The Board
and its committees will keep under active review the financial
expert matter during the 2005 financial year as part of their
nomination and succession planning activities.
Chief Executive and Group Finance Director, after evaluating the
effectiveness of BTís disclosure controls and procedures as of
the end of the period covered by this Annual Report and Form 20-F,
have concluded that, as of such date, BTís disclosure controls
and procedures were effective to ensure that material information
relating to BT was made known to them by others within the group.
The Chief Executive and Group Finance Director have also provided
the certifications required by the Act.
were no changes in BTís internal control over financial reporting
that occurred during the year ended 31 March 2004 that have materially
affected, or are reasonably likely to materially affect, BTís
internal control over financial reporting.
code of ethics for the Chief Executive, Group Finance Director
and Director Group Financial Control and Treasury, adopted for
the purposes of the Act, is posted on the companyís
New York Stock Exchange
2003, the SEC approved the new corporate governance listing standards
of the New York Stock Exchange (NYSE). The company, as a foreign
issuer with American Depositary Shares listed on the NYSE, is
obliged to disclose any significant ways in which its corporate
governance practices differ from these standards.
company has reviewed the NYSEís new listing standards and believes
that its corporate governance practices are consistent with them,
with one exception where the company does not meet the strict
requirements set out in the standards. The standards state that
companies must have a nominating/corporate governance committee
composed entirely of independent directors and with written terms
of reference which, in addition to identifying individuals qualified
to become board members, develops and recommends to the Board
a set of corporate governance principles applicable to the company.
BT has a Nominating Committee.
It does not develop corporate governance principles for the Boardís
approval. The Board approves the groupís overall system of governance
internal controls, governance and compliance authorities. The
Board and the Nominating Committee are made up of a majority
of independent, non-executive directors.